(Kitco News) - The gold market may have 40 trillion reasons to go higher through the rest of the year, but analysts say that renewed expectations that the Federal Reserve still needs to fight inflation could add some volatility to the market next week.
After starting the week with a push toward $4,700 an ounce, gold’s five-week winning streak has come to an abrupt halt. The gold market is ending the week near support at $4,500 an ounce following what analysts have described as hawkish comments from Federal Reserve Chair Kevin Warsh.
Spot gold last traded at $4,473.80 an ounce, down 2.74% on the day. Friday’s selloff has pushed prices down by nearly 3% for the week.
In his much-anticipated speech at the Annual Central Bank Symposium in Jackson Hole, Wyoming on Friday morning, Warsh reiterated the U.S. central bank’s commitment to bringing inflation down to its 2% target.
He said that the Federal Reserve’s price-stability mandate is more of a concern than the slowing labor market.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job . . . our mandate . . . and our charge to keep,” he added.
Following Warsh’s comments, markets started to reprice the possibility of a rate hike in September. According to the CME FedWatch Tool, markets see a 55% chance of a rate hike next month, up from roughly 40% before Warsh’s speech.
Although gold has hit a significant speed bump, many analysts have said that the threat of a rate hike hasn’t derailed the broader market.
David Morrison, Senior Market Analyst at Trade Nation, has been warning investors that gold has become overbought over the last five weeks.
“Gold is still a touch overbought, which is unsurprising given its strong rally this month. It looks to me as if gold, along with silver, still has plenty of upside potential for the rest of this year, and maybe beyond. But today’s price action has put a kink in its progress, and it could provide the catalyst for a more substantial pullback,” he said. “That may rattle some buyers, but it could also shake out the weaker hands and provide a new base which should help prices reset, and give momentum an opportunity to rebuild at lower levels. There are plenty of fundamental reasons to hold gold, and I can think of 40 trillion of them just off the top of my head."
Neil Welsh, Head of Metals at Britannia Global Markets, said that gold’s sharp selloff Friday makes sense as Warsh’s comments have supported the U.S. dollar and pushed bond yields higher.
However, he said that he doesn’t expect Warsh’s comments to derail gold’s long-term uptrend.
“The market is heading into month-end with gold still up around 10% in August, one of its strongest monthly performances in recent memory, supported by a combination of fiscal concerns, Treasury market developments and continued demand for portfolio diversification amid economic uncertainty,” he said. "A single hawkish speech can trigger profit-taking, but it is unlikely on its own to overturn a rally that has been driven by much broader macro forces."
Simon-Peter Massabni, Head of Business Development at XS.com, said that Warsh’s Jackson Hole speech was hawkish enough to put renewed pressure on gold but does not provide sufficient evidence to call an end to the gold rally.
“The bigger battle is no longer simply between gold and interest rates. It is a broader conflict between restrictive monetary policy on one side and rising debt, fiscal risks, economic uncertainty, and financial-market vulnerabilities on the other,” he said. “For that reason, I believe the market has entered a phase where patience is more important than chasing price.”
Bill Adams, Chief U.S. Economist, Fifth Third Commercial Bank, said that although markets are back to pricing in a rate hike next month, a lot can still change between now and Sept. 16.
“Warsh's Jackson Hole speech signals openness to a hike--but the FOMC said the same thing at the last two meetings, yet held steady,” he said. “However, the bar to a hike will likely look higher next week, since payrolls will likely fall in the August jobs report.”
Although the threat of an impending rate hike continues to hang over the market, a growing number of analysts are skeptical that the Federal Reserve will be able to get inflation under control as U.S. government debt remains on an unsustainable path higher.
In an interview with Kitco News earlier in the week, Larry Lepard, Managing Partner at Equity Management Associates, said that even if the Federal Reserve were to raise interest rates once or twice this year, it wouldn’t be enough to stop inflation from moving higher.
He explained that, with government debt now above $40 trillion, the government can’t afford materially higher interest rates.
“The math is not going to work for [Warsh],” he said. “I don’t see how we get out of this without either very high inflation for a bunch of years, kind of like South America, and maybe that’s the outcome, or just an outright failure leading to a monetary reset.”
“I think we can still see multiple years of higher prices because I don’t get the sense at all that, globally, politicians and leaders want to deal with it,” he said.
Although there is still plenty of bullish sentiment in the marketplace, Fawad Razaqzada, Market Analyst at FOREX.com, said that investors should exercise some caution next week as Friday’s selloff has done some technical damage, with prices falling below their 200-day moving average.
“Next support is seen around 4436 and then the 4400 area. It would be a bearish technical development if the buyers don’t show up at those levels,” he said.
Although Warsh said in his speech that the labor market is less of a concern for the central bank than inflation, employment data will provide the main event on next week’s economic calendar.
Analysts have said that the Federal Reserve’s hawkish tilt could quickly change if the labor market continues to slow more than expected. U.S. nonfarm payrolls have fallen short of economists' expectations for the last three months.
Along with employment data, markets will also get manufacturing numbers, which are garnering more attention because of the renewed trade war between the U.S. and Canada.
Markets could also see some headline risk over the weekend as the Group of 20, representing the world’s largest economies, meets in Miami, Florida.
Although markets will have to wait until September 16 for the Federal Reserve’s next monetary policy decision, investors will get some global monetary-policy flavor as the Reserve Bank of New Zealand and the Bank of Canada hold meetings next week.
Economic data to watch next week:
Tuesday: ISM Manufacturing PMI, US JOLTS job openings, Reserve Bank of New Zealand monetary policy decision
Wednesday: ADP private sector nonfarm payrolls, Bank of Canada monetary policy decision
Thursday: US weekly jobless claims, ISM Services PMI
Friday: US Nonfarm Payrolls
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